Economic update the Netherlands: 2024 forecast adjusted downward

During the last week of June, Statistics Netherlands published its second estimate for Dutch GDP growth in Q1 2024, which at -0.5% QOQ is well below their first release of -0.1%. The main cause is a significant downward adjustment in export volumes: The export contribution to GDP growth in Q1 declined from -0.1 percentage point to -1.3 percentage points. The decline is primarily driven by contraction of exports of goods, while exports of services still contributed positively.

On the domestic front, several factors still contribute positively to economic growth in Q1: Private consumption added 0.3 percentage point, and investments contributed 0.1 percentage point. However, the positive contribution from the public sector has disappeared in the revised figures.

The larger-than-usual revision for Q1 is also related to a simultaneous revision of the national accounts data. In this revision, the base year for indexation shifted from 2015 to 2021, and all the annual figures from 1995 to 2023 were adjusted, resulting in a significantly higher GDP in recent years (see figure 1). Our recent report on this national accounts revision provides in-depth commentary.

Another negative surprise came with June’s inflation figure. At 3.4% YOY (HICP), this is significantly higher than the figures for April and May, which were 2.6% and 2.7% respectively. Food prices were a main driver of inflation, particularly prices for processed foods, beverages, and tobacco. The European football championships may have contributed to inflation, as supermarkets may have offered fewer promotional deals than usual in June. In addition, the prices of industrial goods decreased less than in previous months, resulting in an increase in core inflation (inflation excluding food and energy). Inflation of services came in at 5.4%, comparable to the (also high) number in May.

Looking ahead, we have adjusted our inflation expectations upward to 2.9% in 2024 and 2.7% in 2025 (see figure 2). This is due to (slightly) higher energy prices than previously expected, as well as higher rents and food prices.

House rents increase annually on July 1. This year we anticipate a higher increase compared to previous years due to a combination of factors:

Since the social rental sector is much larger than the non-regulated sector, the effect of the housing associations dominates.

We expect modest growth for the remainder of 2024. However, due to the large statistical impact of the GDP decline in Q1 2024 and negative growth in 2H 2023 – causing ‘carry-over effects’ - our economic growth forecast for the entire year 2024 for the Dutch economy has been revised to -0.1% (down from +0.4%). Looking ahead to 2025, the forecast remains at 1.3%.

We do not expect a severe deterioration in the economic outlook, as the labor market in the Netherlands remains relatively favorable. In May, unemployment declined to 3.6%, down from 3.7% in April, and there is a high number of vacancies. An in-depth study by Statistics Netherlands reveals that roughly half of all unemployed individuals are still in education, with many of them seeking part-time or summer jobs. Not surprisingly, over one third of employers cite labor shortages as the main impediment to growth (see figure 2).

The figures for consumption and employment still paint the picture of a robust economy. However, the decline in exports is a cause for concern. It is essential to closely monitor the situation, as a potential decrease in foreign demand for Dutch goods could ultimately weaken domestic economic activity.

The industrial production volume declined by 3.5% YOY in April (see figure 3). This decline is observed across almost all subsectors. In the metal, paper and graphic industry, growth is picking up again after a significant decline in 2023.

Producer confidence has improved slightly, from -2.8 in May to -2.4 in June. However, this remains below the 20-year average of -1.3%. Manufacturers were more positive about expected output and less negative about their stocks, in particular.

Business investment also improved in April, experiencing a 7% YOY increase. However, we expect business investment to flatline for this year and the next. The minor peak expected in Q4 2024 is attributed to changes in the taxation of commercial vehicles, effective from January 2025. Broader investments are much needed in view of the ongoing labor shortage and the energy transition. A slowdown in business investment will make it harder to face these challenges and could be a drag on future growth.